-This is a capital budgeting question. There is a coffee shop called Cough. Calculate the net present value to tell the coffee shop if they should buy the new machine or keep what they have.

-Cough is a very small business however they are getting really popular in their area and the lineups are huge now in the stores so the owner of Cough is thinking of buying more machinery to put with the baristas to make the lines go faster which would be more efficient in the coffee shop.

-The new machine would cost $80,000 to buy and must pay in cash upfront right away and $6000 is the cost expected to operate the new machine in the first year – that would increase by 15% per year after that. 5 years is how long the machine will last and at the end of 5 years the salvage value is $20,000 and so the store owner has to record the depreciation expense of $17,000 per year in the books.

-If Cough acquires the new machine distro or owner estimates that 13,000 more coffees are going to be sold per year at the average price of $6 per regular Cup. the coffees also have variable costs that are $2 and the average selling price and operating costs per coffee are going to remain The same year by year. If the machine is bought the coffee shop has extra fixed costs that are $5000 per year. This $5000 excludes the machine running costs and appreciation Of which $2000 is for non-cash expenses.

-The coffee shop needs a 12% return on all the investments in the new equipment and the cash flows should be rising at the year-end unless the boss told you so and do not worry about tax for this question.

Answer rating: 100% (QA)

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